Business Model Changes of an Incumbent Player in the European Airline Industry A Case of the Lufthansa Group
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Business Model Changes
of an Incumbent Player
in the European Airline Industry
A Case of the Lufthansa Group
Author: Julian Dombrowski
University of Twente
P.O. Box 217, 7500AE Enschede
The Netherlands
j.dombrowski@student.utwente.nl
ABSTRACT
The purpose of this paper is to investigate in how far influencing environmental factors have caused developments and
adaptions to a dominant incumbent player of the European airline industry in the last decade.
As a representative for these various incumbents the Lufthansa Group with its flagship airline Lufthansa has been
chosen as a unit of analysis. Developments within the group were analyzed by using Osterwalder’s business model
canvas framework. Subsequently, these developments were not only reported but also put into context of macro-
environmental and competitive forces that may have caused them in the first place. The data and information have been
gathered via a desk research approach, analyzing majorly annual reports, press releases and newspaper articles of
influential papers.
Results from the research indicate that the Lufthansa Group made majorly small-scale, incremental adaptions to its
practices over the last decade that may have been caused by social, economical and technological forces in the macro-
environment, as well as by competition of low-cost entrants in the European short-haul market. A drastic revolution in
their business model has just emerged within the last couple of years, when a restructuring of the group started. The key
development, is the decision to move most short-haul operations to the low-cost subsidiary Germanwings, having
Lufthansa’s focus on the medium-and long-haul market. This finding indicates some sort of convergence of the
incumbent’s business model on the short-haul segment with the new-entrants approach. Depending on the success of
this move, it may imply a superiority of the low-cost model in short-haul markets, so that the new hybrid approach of
operating different business models in separate markets may indicate the a future alternative of international airline
groups.
Supervisors: Kasia Zalewska-Kurek, PhD.
Björn Kijl, MSc.
Keywords Lufthansa Group, business model, adaption, environmental factor, competition,
convergence, incumbent
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3rdIBA Bachelor Thesis Conference, July 3rd, 2014, Enschede, The Netherlands.
Copyright 2014, University of Twente, Faculty of Management and Governance.1. INTRODUCTION appears interesting to see if a convergence of the incumbent to
the new model takes place since the business model approach of
For decades the structure of the European aviation market was the new player Ryanair seems to be more profitable than the
quite predefined due to regulations of the industry. Before the incumbents approach (see Table 2, p.5) in an industry that is
airline market liberalization, a group of fragmented national air known to be the least of all in terms of profitability (Porter,
markets existed, which were served by national carriers 2008). It adds to literature by examining influential
(European Commission, 2012). Airlines could only act between environmental factors for the airline industry in Europe and by
two markets via bilateral agreements set by governments, studying in how far a dominant incumbent player’s business
leading to a restriction of market forces and competition practices have developed as a response to these.
(Butcher, 2010; Morrell, 1998). The whole liberalization of the
The outline of this thesis will be as follows: First a theoretical
airline industry aimed at creating a single, integrated European
framework will start by giving an insight to the concept of
airline market (European Commission, 2012), with the intention
business models, by explaining its origin, issues surrounding
to bring benefits to consumers by lower fares and a wider
the theory, its benefits and framework approaches in analyzing
choice of offers, based on the principle of competition (Morrell,
the concept. It will be finalized by a short review of academic
1998). Prior to this de-regulation inefficiencies by traditional
literature on the topic of business model evolution and causing
carriers were relatively protected due to their monopolies, being
factors. In the following the analysis part will begin by
at a disadvantage for consumers and the economy as a whole
examining the dominant factors that may have affected the
(Doganis, 1994; Wright, 2014). The market liberalization took
development of business models in this market. As a final step
place as a series of three packages that were gradually
the dominant incumbent player the Lufthansa Group, with its
implemented in the time period of 1987 to 1997 by the
flagship Lufthansa, will be studied to identify adaptions in its
European Commission (Butcher, 2010; Morrell, 1998). Results
business model, which may represent a response to observed
from the liberalization were new entrants to the industry in
environmental factors, and to see if a convergence to the new
general (Doganis, 1994; Morrell, 1998) and the emergence of
business model approach, driven by low-cost principles, is
new players as low-cost airlines like Ryanair, Virgin Express or
detectable.
Easyjet (Buck & Lei, 2003; Graham, 1998; Mason, 2001). This
so-called liberalization of the European aviation market can be
seen as the trigger for the evolution of new business models in 2. THEORETICAL FRAMEWORK
the aviation industry in Europe, which were further
accommodated by influential environmental factors. In 2.1 Business Models: Origin, issues,
particular did the liberalization of the aviation market open the functions and frameworks
doors for the “new” business model of low-cost carriers.
According to the German Aerospace Center “Low cost carriers 2.1.1 A business model, what is it?
[…] focus on cost reduction in order to implement a price The concept of business models is among the most prominent
leadership strategy on the markets they serve.” (DLR, 2008, p. topics in modern literature (Baden-Fuller & Haefliger, 2013;
8). Before the liberalization the models of charter airlines and Chesbrough & Rosenbloom, 2002), while at the same time
full service carriers solely dominated the market. As the being one about which little consensus among academics exists.
dominant incumbent a full service carrier can be defined as “a (Al-Debei & Avison, 2010; DaSilva & Trkman, 2013).
“legacy” or “full service network carrier” is an airline that As described in DaSilva and Trkman (2013) and Osterwalder,
focuses on providing a wide range of pre-flight and onboard Pigneur and Tucci (2005) “business model” as a term has been
services, including different service classes, and connecting first used by Bellman et al. in an academic article published in
flights.” (DLR, 2008, p. 5). 1957. Nevertheless, business models as a widely used topic
The research goal of this paper is to determine in how far the have just become popular since the advent of the Internet age,
business model of a dominant incumbent following a full- especially among high-tech start-ups (DaSilva & Trkman, 2013;
service approach has developed over the last decade. A focus Demil & Lecocq, 2010; Magretta, 2002; Osterwalder et. al.,
lays on developments in response to environmental factors 2005; Shafer, Smith, & Linder, 2005). Nonetheless, the concept
influencing the industry in Europe, and to explore if a did not only attract the interest of consultants and managers
convergence to the more novel low-cost model is observable. (DaSilva & Trkman, 2013), but as well of academics and
researchers, as an analysis of the term business model in the
As a guiding research question the following will serve: electronic bibliography “Scopus” (www.scopus.com) shows.
In how far did a dominant incumbent firm of the European Published literature in the disciplines of accounting and
airline industry react in response to environmental changes, by management sciences containing the term within the text or in
making adaptions to its underlying business model over the last the title has substantially increased up from year 2005, as
decade? visible in Figure 1.
A sub-question relevant in the analysis part will be: What have A key issue concerning the concept is that “no generally
been dominant environmental factors that affected the evolution accepted definition of a business model has emerged” (Shafer et
of business models in the European airline industry? al., 2005, p. 202). Baden-Fuller and Haefliger (2013) define a
business model as “a system that solves the problem of
This topic appears worth discussing in times when European
identifying who is (or are) the customer(s), engaging with their
airlines as the AirBerlin Group are in severe financial troubles
needs, delivering satisfactions, and monetizing the value.” (p.1).
(AirBerlin, 2014; Vasagar, 2014), while the low cost airline
In contrast to that Chesbrough and Rosenbloom (2002) rather
Ryanair has been able to report new record profits in its most
see a business model as a mediator between technical inputs
recent annual report of 2013 (Ryanair, 2013). Furthermore, it
and economic outputs, which is needed for successful
1commercialization. Shafer et al. (2005) define it as “a particular business-model acts as some sort of filter, which will
representation of a firm’s underlying core logic and strategic focus on particular practices and activities, while other
choices for creating and capturing value within a value alternatives may get neglected and sorted out (Chesbrough &
network” (p. 202). Rosenbloom, 2002; Teece, 2010). Furthermore, business
models “can be powerful tools for analyzing, implementing and
communicating strategic choices” (Shafer et al., 2005, p. 200).
2500
Next to that a business model may act as some sort of common
2000
language among stakeholders and serve as a cognitive tool for
visualization (Arend, 2013). As Zott and Amit (2010) describe
#
of
Publica,ons
1500
it business model choice is of crucial importance for a variety of
reasons. Firstly, it determines the set of activities performed and
1000
resources needed by a company; secondly, it determines the
ability to create and gain value, depending on the competitive
500
surrounding; thirdly, it determines a company’s bargaining
power, again depending on the competitive environment
0
determined by the choice of business model; and lastly, it as
1961
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
well predetermines a company’s key partners, suppliers and
customers outside its own micro environment. Next to that,
paying attention and gaining an understanding of the concept of
Figure 1: Amount of publications in the electronic business models is important, since if done well they have the
bibliography “Scopus” in the fields of accounting and chance to reshape industries and the competitive environment
management containing the term “business model” (Johnson, Christensen & Kagermann, 2008; Teece, 2010).
Osterwalder et al. (2005) identify five functions that the
Another interpretation is given by Zott and Amit (2010) who
concepts of business models serve. They help to gain an
describe it as “the content, structure, and governance of
understanding of the core business logic and facilitate sharing
transactions designed so as to create value through the
with others, it contributes to analyzing the business logic, it
exploitation of business opportunities” (p.219). Osterwalder et
improves the management of a company, and lastly it enables to
al. (2005), who gained popularity in the field of business
compile possible scenarios and futures of a business. According
models, define it as:
to Chesbrough and Rosenbloom (2002) a business model has
“A conceptual tool that contains a set of elements and the following six functions: a) to articulate the value
their relationships and allows expressing the business proposition; b) identify a market segment; c) define the value
logic of a specific firm. It is a description of the value chain structure; d) estimate the cost structure and profit
a company offers to one or several segments of potential; e) describe the firms position within the value
customers and of the architecture of the firm and its network; and f) formulate a competitive strategy. Magretta
network of partners for creating, marketing and (2002) sees business models as some sort of hypotheses, which
delivering this value and relationship capital, to are getting tested in the progress of business and are as a
generate profitable and sustainable revenue streams.” response to feedback and success adapted. “A business model’s
(p.16). great strength as a planning tool is that it focuses attention on
In 2010, Osterwalder and Pigneur presented another definition, how all the elements of the system fit into a working whole.”
which is comparatively short to their previous one: “A business (Margretta, 2002, p.6).
model describes the rationale of how an organization creates, What becomes evident from this section is that academics
delivers, and captures value” (p.14). At last, a very different haven’t found a universal agreement on the pure functions of
approach is taken by Magretta (2002), who claims that business business models yet, which probably results from different
models are “stories that explain how enterprises work.” (p.4). research backgrounds and different underlying definitions of
These stories will then answer questions concerning customer what the concept actually is and contains. Albeit, there is some
segments, what customers do value, how to make money, and agreement that the choice for a specific approach of a business
how to deliver value at a low cost. model is of great importance for a company, since it will have
As this input of only a few definitions shows, there is clearly no profound influence on future decisions and the market a
conformity on the concept yet. Concluding, one can say that company is operating in. For example, it may pre-determine the
most prominent definitions have the aspect of value, either in available supplier base, the market segment and a company’s
the sense of creating it and transferring it to consumers or competitors. Next to that, it appears as well that research so far
otherwise taking the company’s perspective in capturing it, in agrees to a certain extent that a business model facilitates the
common. understanding of core ideas and the sharing of these with others
as possible investors or stakeholders, like employees and
2.1.2 Functions of business models suppliers.
A critical question is why business models are perceived as
such important and what their use is for companies. Baden- 2.1.3 Issues relating the concept
Fuller and Haefliger (2013) for example argue that a “business Besides being a very popular topic, business models remain as
models choice determines the nature of complementarity well extremely controversial, as expressed by an over-existence
between business models and technology and the paths to of definitions, which is as well acknowledged by academics
monetization. A poor choice can lead to low profits, a good (DaSilva & Trkman, 2013; Osterwalder et al., 2005). Al-Debei
choice to superior profits.” (p. 4). Next to that the choice of a and Avison (2010) claim such a lack of consensus may as well
2come from the fact that the concept of business models is business model according to two dimensions. On the one hand
investigated by a variety of different research backgrounds and design elements describe a companies content (what activities
is applied by practitioners according to their individual are done?), structure (how are activities linked?), and
company’s context. This trouble of research being conducted by governance (who and where will activities be performed?).
various academic perspectives, which leads to different These design elements describe the basic set up of the company.
interpretations of the business model concept, is further On the other hand they are not complete and useful without
supported by Chesbrough and Rosenbloom (2002), as well as design themes, which describe the general competitive
Shafer et al. (2005). Next to that “one of the shortcomings in approach taken by a company. Those can be novelty
business model literature is that the different authors rarely (innovative approach), lock-in (buy in elements to keep
build on each other. Consequently, business model research as a consumers), complementarities (activity bundling) or efficiency
whole advances more slowly than it could and often stays at a (reducing costs by optimization). According to this framework
superficial level.” (Osterwalder et al., 2005, p. 33). As Al-Debei companies’ need to make decisions about all those design
and Avison (2010) observe business-models are frequently elements and combine them with themes, which will result in a
falsely used and confused with other management concepts as distinctive business model and by that an individual way of
strategy, supporting confusion and discussion about the concept creating and capturing value. Another framework is the V4
(DaSilva & Trkman, 2013; Magretta, 2002). However, Shafer et Business Model Ontological Structure proposed by Al-Debei
al. (2005) bring it quite straightly to the point; a business model and Avison (2010). At its core it consists of four value
is not at a strategy, which is further supported by Teece (2010). dimensions; starting with the value proposition as the central,
Chesbrough and Rosenbloom (2002) define three major points most important factor. Next to that value-architecture,
of difference between the concepts of strategy and business comprising resources and competences; value-finance,
models; those are a) a clearer focus on value capturing by the including revenue streams and pricing models; and the value-
strategy concept; b) financial dimensions are more frequently network, representing the inner and outside relationship web,
neglected in business models; and c) strategy assumes form the residual three dimensions. A tool that has become
availability of a vast amount of reliable information, while prominent recently, and which will be used as a tool of analysis
business models assume limited knowledge biased by previous in this paper, is the business model canvas framework of
experiences. A further critical difference to strategy lies in the Alexander Osterwalder, which is based on work of his doctoral
fact that business models do only describe how the links of an dissertation in 2004 (Osterwalder, 2004). The business model
enterprise work, however they do not take care of competition canvas consists of nine building blocks forming the four key
as a factor (Magretta, 2002), which is a fundamental element in pillars of the framework, which are offer/ product, customers,
strategy. infrastructure and financial viability. Those building blocks are
arranged visually as a framework, which can be frequently used
2.1.4 Frameworks for analysis as a template for printing and a consequential analysis. As the
Several academics have proposed so-called frameworks, meta- authors describe it themselves, the business model canvas forms
models or ontologies, which shall enable an easy analysis of “a shared language for describing, visualizing, assessing and
companies’ business models by determining which elements are changing business models” (Osterwalder & Pigneur, 2010,
typically expected in a business model. Similarly, entrepreneurs p.12). Due to its set up it allows a comprehensive and accurate
can use such frameworks in order to facilitate the development assessment of an enterprise and its environment (Anderson et
of their own business model. Zott and Amit (2010) propose an al., 2006). This is as well acknowledged by Maurya (2012),
activity system design framework, which disassembles a who used the canvas business model as a basis for his design of
Table 1: The pillars and corresponding building blocks of the “Business Model Canvas Framework”
Pillar Pillar Building Block Description
Offer / Product Value Proposition “The aggregation, or bundle, of benefits that a company offers customers.”
(Osterwalder & Pigneur, 2010)
Customers Customer segment “The different groups of people or organizations an enterprise aims to reach and
serve.” (Osterwalder & Pigneur, 2010)
Channels “Describes how a company communicates with and reaches its customer segments to
deliver a value proposition” (Osterwalder & Pigneur, 2010)
Customer Relationships “Describes the types of relationships a company establishes with specific customer
segments. ” (Osterwalder & Pigneur, 2010)
Infrastructure Key resources “Describes the most important assets required to make a business model work.”
(Osterwalder & Pigneur, 2010)
Key activities “Describes the most important [actions] a company must do to make its business
model work.” (Osterwalder & Pigneur, 2010)
Key partnerships “Describes the network of suppliers and partners that make the business model
work.” (Osterwalder & Pigneur, 2010)
Financial viability Revenue streams “Describes the way a company makes money through a variety of revenue flows.”
(Osterwalder, Pigneur, & Tucci, 2005)
Cost structure “Describes all costs incurred to operate a business model.” (Osterwalder & Pigneur,
2010)
3a lean canvas, which is similar to Osterwalder’s but has a focus In order to analyze business model factors causing dynamics in
on entrepreneurs designing their own start-up business models. the European airline industry a guiding model or framework is
Table 1 gives a short description of the individual building needed. Since this analysis will take place at an industry level, it
blocks and their affiliation to the four pillars. will be focused on macro-environmental factors. A useful tool
As with the definitions, the approaches to a framework or for such an analysis is presented by the PESTEL framework,
ontology differ again, depending on the researcher describing it. which “categorizes environmental influences into six main
However, it is as well visible that a central part in most types: political, economic, social, technological, environmental
frameworks is the aspect of value, which is transferred to a and legal.” (Johnson, Whittington, & Scholes, 2011, p. 50). It
customer. Summarizing it can be said, as Al-Debei and Avison appears to be a valid approach, since for example Kijl et al.
(2010) support it, that the business model concept in general (2005) describe the framework as “useful for analyzing [macro-
needs clarification and consensus, so that as a final result a environmental] factors that are affecting organizations.” (p. 8).
unified single framework can be created. When talking at the industry level a major factor that may cause
dynamics can be competition, which should not be neglected.
2.2 Business model dynamics Since competition does not represent a macro-environmental
factor the PESTEL framework does not cover it. An important
After having gained an insight into the concept of business concept describing this force is represented by Michael Porter’s
models, the topic of evolution and innovation of business five forces framework (Johnson et al., 2011; Porter, 1979). The
models and the driving factors, which may lead to such framework helps in assessing the degree of competition in a
developments, are still missing and will subsequently evaluated. particular industry and by that its attractiveness. It consists of
“Business model innovation refers to the search for new logics the five competitive forces: the threat of new entrants, the
of the firm and new ways to create and capture value for its bargaining power of buyers, the bargaining power of suppliers,
stakeholders […].” (Casadesus-Masanell & Zhu, 2013, p. 464). the threat of substitutes and the extent of rivalry among existing
competitors (Johnson et al., 2011; Porter, 1979; Porter, 2008).
As observed by Kijl, Bouwman, Haaker and Faber (2005) the
question of which factors may drive a change in business
Macro-environmental
Competitive forces
models for firms is not in depth investigated by researchers yet.
Therefore, the key question concerning this topic is what kind forces
of factors may have an influence on business models of Operating
companies. Business Model
Demil and Lecocq (2010) say, “a business model may evolve as
response to both external and internal factors” (p.236). External
factors are according to the authors equal to environmental
changes as new entrants or increased costs for key resources.
Adaptions &
Other external factors that may trigger a need for adaption in a
developments
business model can be innovative technologies, deregulation or
market changes (Al-Debei & Avison, 2010). According to
Teece (2010) factors might be market changes, technologies or
legal developments. Baden-Fuller and Haefliger (2013) argue
that business model innovation does not necessarily need a shift
New
in technology to occur, an example stated by them would be the Business Model
just-in-time principle, developed and adopted in Japan. As said
before, Demil and Lecocq (2010) argue that those dynamics do
not only emerge from the outside of a company but can as well
arise from the inside. They name four overarching areas of
Figure 2: Potential forces influencing the adaption to a new
change within a firm that may give rise to shifts in a dominant
business model
business model. Those are a) crucial management decisions; b)
uncontrollable developments in elements (e.g. reputation or
externalities); c) the interaction of elements within core 3. METHODOLOGY
components (e.g. synergies); and d) interactions between core
This paper follows a qualitative, exploratory research approach,
components (e.g. complementarities).
in order to gain insights to market developments of the
One thing various scholars agree on is the factor of competitive European airline industry and emerging trends in business
advantage. As Teece (2010) claims “business model innovation approaches. The analysis of this paper consists of two parts,
can itself be a pathway to competitive advantage if the model is firstly, a study of factors influencing business models that are
sufficiently differentiated and hard to replicate for incumbents prevalent in academic literature and secondly, a study of the
and new entrants alike” (p.173), which is as well supported by developments in the business model of a dominant incumbent
Magretta (2002) saying that a business model itself can be a of the full-service airline approaches.
competitive advantage in the market. Besides that, Weiller and
Neely (2013) frame it in a different way by observing that The data for the literature review has been gathered by the use
companies have to develop their business models in order to of the electronic bibliographies and search engines Scopus,
retain their initial competitive advantages. Google Scholar and the library catalogue of the University of
Twente. Furthermore, the so-called snowball method (van
Aken, Berends, & van der Bij, 2012) was used, especially
4tacking the approach of backward snowballing, which is the in the residual building blocks will be more briefly studied as
tracing of influential references used in relevant literature. An well.
initial screening of the abstract and contingently its conclusion
assessed academic articles, in order to see a potential As a key player the Lufthansa Group, as representative of full-
contribution to the literature review. As a basis of analysis the service airlines is chosen. The Lufthansa Group is picked since
it represents Europe’s biggest airline group (Statista GmbH.,
PESTEL framework is used, since macro-level factors shall be
identified, having an impact on all industry players as a whole 2014) having a long heritage in the passenger market and being
not only on single ones. However, the analysis will be focused as well by that a dominant incumbent player of the industry.
on the dimensions of economical, social and technological The Lufthansa Group as a whole operates in a variety of
aspects, making it rather an EST analysis. This focus is done, different business segments; nevertheless the analysis will focus
since it is assumed that those dimensions contain most on the passenger airline segment, with the flagship Lufthansa.
influential drivers for a distinct development in business As a major unit of analysis Lufthansa Passage will be studied,
practices. Next to that, it is expected that factors in other since it represents the traditional core element of the group.
During the analysis of certain building blocks other subsidiaries
dimension, as regulatory compliance, would have an influence
on business models in the industry, however not in way that of the group may become part of the analysis as well. In Table 2
may have lead to differentiated adaptions and evolutions. key figures of the Lufthansa Group are presented, for
Economic factors will be studied with focus on macro- comparison the corresponding data of Ryanair, representing
environmental developments as increases in consumer demand, Lufthansa’s biggest European competitor in the short-haul
economic growth or shifts in disposable income. Social, or market and being at the same time a pioneer of the low-cost
respective socio-cultural factors do include lifestyle trends, approach in Europe, are shown as well.
shifts in consumer preferences and attitudes or demographic Table 2: Key figures of the Lufthansa Group and its
changes. Finally, technological factors will concentrate on competitor Ryanair
technological shifts and advancements as the role of the Internet
or progress in communication technologies.
The PESTEL analysis will be accompanied by an assessment of Ownership German “Aktiengesellschaft” Public limited company
the industry’s competitive situation by the use of Porter’s five structure Public limited company
Founded 1953 1985
forces framework. The individual dimensions will be shortly Headquarter Cologne, Germany Dublin, Ireland
assessed in the first part of the analysis, a focus will lie on the CEO Carsten Spohr Michael O’Leary
present and growing rivalry among existing players. This focus Business 1. Passenger Airline 1. Passenger Airline
segments Operator Operator
is done, because it is assumed that competitive rivalry forms a 2. Logistics
significant influence on the business practices of incumbents in 3. Maintenance, Repair &
the industry. Besides, the other four dimensions form the Overhaul
4. Catering
competitive environment of the industry in general, but may not 5. IT Services
have lead to individually different business model adaptions of Destinations 274 180
new and incumbent players. Furthermore, it is based on the Fleet size 6221 305
# Employees 118, 214 9,059
limitation of a restricted length of this article, which inhibits
# Passengers 104.58 million 79.3 million
both a complete PESTEL and five forces analysis, without Turnover € 30.02 bn. € 4.88 bn.
acting on a superficial level. Profit € 313.00 mil. € 569.30 mil.
1
20 airplanes belonging to the Lufthansa Cargo (Logistics) segment
In its second part the analysis will take form of a case study, Sources:
examining the development of core business practices of one Ryanair, 2013; Ryanair, 2014a; Ryanair 2014b; Deutsche Lufthansa AG, 2014c
key player of the full-service business model approach over the !
The approach for analyzing developments of this player will be
last decade by using Alexander Osterwalder’s canvas done via the assessment of secondary data. An essential source
framework (Osterwalder & Pigneur, 2010). A study of these will be annual reports prepared and published by Lufthansa
developments will especially try to reveal distinctive reactions from 1997 to 2013, next to that press releases, newspaper
to observed influencing environmental forces. Reasons for articles and website information will serve as further sources. A
choosing the canvas framework for analyzing the business limitation of taking annual reports as a main source might be a
model developments are that it takes a holistic approach, being positive bias towards the companies’ performances (Demil &
not only focused on revenue and cost streams. Next to that the Lecocq, 2010). Due to the high regulatory demands put on these
argumentation of Maurya (2012) is followed in saying that the reports they appear to be still a valid source.
framework allows a fast and concise analysis of a company’s
business practices. The analysis will give a special focus on the
building blocks of key partners, value offering, customer 4. ANALYSIS
segments and the financial structure consisting of revenue
streams and a company’s cost structure. By this at least one 4.1 Driving factors to business model
dimension of every pillar of the business model framework is in changes
depth investigated. The focus on these dimensions is grounded
by the assumption that differentiated adaptions to the 4.1.1 The macro-environment
incumbent’s business model have occurred in these sections, 4.1.1.1 Economical
indicating an evolution of the business model. Nevertheless, The growth in disposable income (Eurostat, 2014) has made it
since a business model has to be analyzed as a whole, changes possible for more people to take advantage of air travel
(Dresner, 2006; Graham, 2006; Graham & Shaw, 2008).
5However, demand is not only raised by an increase in average one can see Germanwings offering blind-booking services.
disposable income, but as well by lower ticket fares in the Here leisure travelers can select a package, representing the
short-haul market (Wensveen & Leick, 2009). As Graham & possibility of various destinations for a comparable low price
Shaw (2008) state low-cost airlines do not only benefit from (Germanwings, 2007). Until the purchasing process is finished
increased demand by an increase in disposable income, but they customers do not know what their travel destination will be,
as well facilitate that development by pushing market fares expressing someway the willingness of choosing low-costs for
further down (O’Connell & Williams, 2005). Another feature, an unknown outcome (Mason, 2005).
that belongs partly to the political dimension and which
contributes to increased demand in the tourism industry in
4.1.1.2.2 Fragmentation of the business traveller
general and the airline industry in particular, is the enhanced segment
freedom of movement of people (Mason & Alamdari, 2007), Literature recognizes a decreasing propensity of people using
which expresses itself in the abolishment of inter-European business class offerings, especially on the short-haul
borders. Not only economic development but as well low-cost destinations, instead switching to the cheaper economy class
carriers themselves contribute to increased interest in air travel, (Mason & Alamdari, 2007) or even to low-cost airlines (Fourie
as Graham (2006) argues low-cost carriers are generating traffic & Lubbe, 2006; Mason, 2005).
by encouraging more frequent flying, instead of only “appealing As Dresner (2006) says “a key difference between leisure and
to the less wealthy parts of the population” (p. 19). Therefore, it business passengers, […], relates to their price elasticity of
is assumed that increased demand for air travel in the European demand” (p.29). Instead of looking primarily for low-costs,
Union is an economic driver for adaptions in airlines’ business business passengers are rather valuing time (Dresner, 2006),
models. It is proposed that this factor may have been generated which may benefit low-cost carriers, since their business model
by general lower competitive airline fares and a higher aims for a higher frequency of flights, by having low
disposable income of EU citizen, which may have lead to a turnaround times (ELFAA, 2004). Gilbert, Child and Bennett
higher amount to spend. (2001) conclude that quite a lot of business people would be
4.1.1.2 Social willing to use low-cost airlines, indicating those could make use
In the social dimension of the PESTEL framework two major of the business passenger segment as long as they would offer
trends can be observed, which are namely a developing frequent flights and have a high punctuality. Furthermore, do
affection of consumers for shorter but more frequent holidays a business passengers increasingly use low-cost carriers because
year and a fragmentation of business travellers, which will be of a more dispersed choice of destinations (Mason & Alamdari,
explained in a moment. 2007).
4.1.1.2.1 Shifts in consumers’ holiday preferences It is further observed that the two types of business and leisure
customer are quite similar in a variety of aspects, making it not
In general it can be said that leisure travel has risen on a much that necessary for airlines and airports to differentiate between
faster level than business travel (Dresner, 2006; Mason & them (Dresner, 2006), as for example via separated cabins.
Alamdari, 2007), making it important to look on developments However Huse and Evangelho (2007) conclude that there are
in this customer segment. two types of business travellers. On the one hand the no-frills
It is observable that the valuation of time has changed in recent passengers having a more simplistic attitude towards the travel
decades. A tendency towards taking shorter holidays but those service and on the other hand the so-called luxury-loving
then more frequently a year has developed (Buhalis & Law, passengers, who value mile programs, lounges and service
2008; Mason & Alamdari, 2007; Teichert, Shehu, & von quality quite high. Especially “senior executives seem to be
Wartburg, 2008). As Graham (2006) further states this is partly keen on business lounges” (p.266). A further result of the
due to increased work pressures in today’s society, leading to research of Huse and Evangelho (2007) is the importance of
fear of job loss and the unwillingness to stay away from the exposure to low-cost services. They found out that a significant
work place for too long time. Next to that the sociological amount of business passengers do reassess the no-frills services
development of couples having both partners full-time working provided by full-service airlines against the increased price,
may make it increasingly difficult to arrange joint long-term once they have been flying with the low-cost alternative, being
holiday breaks. Moreover, do flexible working arrangements in favor of the latest. With regard to special business customer
make it as well possible to take an extended weekend break, as segments it is likely that especially small and medium
for example a short city-trip (Graham, 2006). In this dimension enterprises (SMEs) are rather looking at the price when
low-cost airlines are not only a big winner from this selecting business travel opportunities (Fourie & Lubbe, 2006;
development but as well actively encourage weekend-breaks Graham & Shaw, 2008; Mason, 2001; O’Connel & Williams,
(Buck & Lei, 2003). Due to this, it can be argued that besides 2005), than big, listed corporations having travel policies and
price level and economic conditions, time available for leisure designated departments for arranging trips, who may able to
activities is an important determinant in the demand for leisure negotiate special terms (Mason, 2001; O’Connell & Williams,
travel services (Graham, 2006). This is especially important for 2005).
air travel services, since shorter holidays may imply that The findings from the literature, concerning reassessment of
minimizing travel time becomes gradually more important to inflight services, as well as the continuous use of low-cost
benefit most from the holiday (Graham, 2006). airlines by business customers, actually gives rise to the
Nevertheless, Mason and Alamdari (2007) say “low fares have assumption that a price elasticity of demand for business
been the main stimulus for growth in leisure travel, with leisure passengers partly exists, which would be in favor of the new
passengers being prepared to switch destination for good deals.” low-cost model approach. This is supported by Mason &
(p. 303). As an example of a low-cost airline reacting on this,
6Alamdari (2007) and is by that somehow in contrast to the various alliances of airlines (Buhalis, 2004). Though, if
statement of Dresner (2006). passengers use those platforms for finding low fares they appear
to be more beneficial for low-cost carriers who are then
4.1.1.3 Technological displayed more frequently. Such ICT progress leads to an
A further factor that benefited adaptions in business models of increased price transparency (Buhalis & Law, 2008; Mason &
the airline industry and the emergence of low-cost carriers has Alamdari, 2007) leading to lower competitive fares, which is
been the Internet and technological progress in general (Gilbert further accommodated by technological advancement as more
et al., 2001; Mason & Alamdari, 2007). Buhalis (2004) goes so fuel-efficient air planes (Franke, 2007), enhancing the demand
far and says that the arrival of the Internet enabled new business by leisure passengers (Mason & Alamdari, 2007).
models in the airline industry to emerge. It is clear that not-only
low-cost carriers benefited from the Internet but the industry as However, Mason & Alamdari (2007) as well recognize that
a whole, including charter and full-service carriers. The ICTs may as well decrease demand for air travel services, as for
important difference however is that low-cost carriers may have example business customers need to travel less frequently for
been better able to take advantage of this initial technological meetings, since web-conferences represents a fast and
shift in certain areas as operational efficiency, since they were extremely cost efficient alternative.
less inclined by established practices (Buhalis, 2004; Buhalis &
Law, 2008). The use of information and communication
4.1.2 The competitive environment
technology (ICT) made it possible for all players to improve its This section will focus on the current competitive rivalry in the
operations, as fleet or staff utilization, or improve in-flight European airline industry as an external force to incumbents’
entertainment and traveller satisfaction (Buhalis, 2004; Buhalis business models in the market. The residual four forces are as
& Law, 2008), which appears to be more important for full- well briefly displayed, since they shape the competitive
service carriers. Most importantly for low-cost carriers did the situation in the industry in general, however it is assumed that
Internet and ICTs make it possible to directly communicate competitive rivalry is the main force causing dynamics in
with customers and by that pushing away intermediates as incumbents’ business models.
travel agencies (Buhalis, 2004), having more direct, online Rivalry among competitors in the European market can be said
bookings by customers (Gillen & Lall, 2004), which reduces to be high (Wright, 2014), several players compete on similar or
costs dramatically. Another form of those intermediates that even the same routes within the intra-European market. This
emerged in the travel industry have been online-travel agencies rivalry as well expresses itself in a low average-profitability of
as Expedia and more significantly websites comparing flight the industry in general (Porter, 2008).
fares online, as Swoodo or Opodo, which have been set up by
With regard to environmental factors that may cause business
Economical
European Airline Industry
! increased demand for air travel in
Europe, possibly due to lower
competitive fares and growing
Low$Cost(Carriers(
disposable income of citizens
Ryanair
Easyjet
Social
! tendency to shorter but more frequent
holiday breaks in leisure travel
! fragmentation of business passengers in Competitive Rivalry
luxury loving and no-frills attached
! decreasing propensity of business class
users, especially on short-haul
Technological Lufthansa
! occurrence and improvement of the
Internet
! rapid progress in the quality of
information & communication Full-Service Carriers
technologies
Figure 3: Driving factors of the macro- and competitive environment to business model changes of incumbent full-service
players in the European airline industry
7model dynamics, competition by other players can be assumed dynamics are rather expected to be focused on the short- to
to have a profound influence on incumbents’ practices. In this medium-haul market. Nevertheless one could argue that it is
sense, especially low-cost airlines as Ryanair and Easyjet some sort of reaction to a continuous increase in air travel
represent a threat to the incumbents of the industry in Europe demand, since those alliances and joint ventures promote a
(Deckstein & Mahler, 2011; Deutsche Lufthansa AG, 2011b). more dispersed offering of destinations. However alliances can
The importance to see competition, especially of low-cost rather not be seen as a reaction on the dynamic of technology
players, as an external force that may cause alternations in but that they are rather facilitated and enabled by the improved
Lufthansa’s business model expresses itself in the increasing ICT capabilities of all partners. With regard to competition of
market share of low-cost players (DLR, 2008; Thomas, 2013). low-cost airlines, the situation is alike to the social dimension.
As the German Aerospace Center reports low-cost airlines The competition of low-cost airlines is focused on the inner-
increased their market share in seat capacity from 1998 with 5% European short-haul market, while these alliances are
to 2008 with 30% in the European geographic market (DLR, concentrated on the long-haul destinations to connect
2008). In a recent press release the European Commission made continents. Nevertheless, one could argue that alliances try to
it even more drastic by stating “In 2012 for the first time, low- promote more frequent long-haul travel by that tacking away
cost airlines (44.8%) exceeded the market share of incumbent customer from the short-haul market and by this from low-cost
air carriers (42.4%), a trend which continued in 2013.” competitors.
(European Commission, 2014, para. 9). The significance as a A second development that occurred on a continuous basis in
factor is even more evident by the fact that Ryanair nowadays the last decade is the acquisition of and investment in other
forms Europe’s second biggest airline after the Lufthansa airlines. Acquisitions are majorly focused on the inner
Group (Statista GmbH., 2014), being the biggest rival on the European market as SWISS Airlines (Deutsche Lufthansa AG,
short-haul market for the incumbent. If looking at airlines 2008) or Germanwings (Eurowings, 2014), while investments
individually, Ryanair is even exceeding the passenger numbers do rather occur into other continental operating markets.
of Lufthansa, as a single airline. Based on these observations it Examples of investments are share acquisitions of the no-frills
is proposed that competition by low-cost airlines forms a airline JetBlue Airways in the United States (Deutsche
driving external force to the incumbent’s business model, Lufthansa AG, 2009; JetBlue Airways, 2014) or the joint
represented by the Lufthansa Group, potentially causing venture of Sun Express with Turkish Airlines (SunExpress,
adaptions to it. 2014), however this joint venture had already been started way
For thoroughness the residual dimensions of the five forces ahead of Lufthansa’s privatization. This development is
framework are subsequently evaluated in Box 1 presented in assumed to be a reaction on environmental factors in the
appendix 9.5. economic and social dimension. First the increase of the group
network facilitates the range of offered destinations to
4.2 Business model dynamics of the customers, which is needed to meet increasing demand and
potentially to promote further new demand. Depending on the
Lufthansa Group level of interactions and created synergies with alliance
The following section will display observations of partners, joint ventures and subsidiaries, the Lufthansa Group
developments and evolutions in the Lufthansa Group’s business and its partners may actually be able to actively shape the
practices. Selected building blocks of the business model economic factor of increasing demand for air travel by pushing
canvas framework will be displayed in depth while the residual down fares due to lower costs. Next to that, the acquisition and
ones won’t be neglected but more briefly studied. Those investment in budget airlines as Germanwings, show a reaction
developments will not only get described but as well put into on the social dynamics of no-frills business travellers and as
potential relations to already analyzed influencing well shorter holiday breaks. These shorter holiday breaks are
environmental factors. for example promoted and answered by Germanwings, which
had introduced their blind-booking service in 2007
4.2.1 Key Partners (Germanwings, 2007), which reacts and facilitates the demand
In this building block one can observe several developments of short-haul weekend trips. Besides, the investment in budget
that in its essence have already been pursued by the Lufthansa airlines may show some sort of reaction to the driver of low-
Group since its privatization in 1997. Those developments can cost competition. In the case of Germanwings this is done via
be categorized in the sections of creation of alliances and joint entering the low-cost segment in Europe and actively
ventures, subsidiaries plus investments and the Star Alliance. competing with the low-cost players in their own segment. In
the other cases it appears to be more like a financial investment
It can be observed that within the last decade the Lufthansa to get a return, since those players operate on different short-
Group has set up a vast amount of alliances around the globe as haul markets, away from the home base of the Lufthansa
well as joint ventures, as the A++ for the North American Group. Otherwise these investments may function to get some
market in cooperation with United Airlines and Air Canada foot into these markets, to supplement long-haul arrivals in
(Deutsche Lufthansa AG, 2011a) and J+ for the Asian market in these regions. Finally, as with the creation of alliances
cooperation with All Nippon Airways (Deutsche Lufthansa AG, technology can rather not be seen as a driving force leading to
2012a). These alliances and joint ventures have brought benefits this development, but again acts more as a facilitator, since
to consumers by enabling easier switches between flights and a improved ICT capabilities encourage a more easy and intense
generally higher accessibility of destinations (Deutsche cooperation between the different Lufthansa Group members
Lufthansa AG, n.d.a). This development can not be seen as a and partners.
reaction on factors in the social dimension since these alliances
majorly have effects on the long-haul market, while social
8A last finding, which is detectable in this section, is the heavy previous low-cost customers to reassess the value of these
focus of the Lufthansa Group on the STAR Alliance that has services and switch their supplier of travel services back to
grown rapidly since its foundation in 1997, having today 26 Lufthansa. Further, it may support the retaining of already
members (Star Alliance, 2014). It is observable that several of existing customers, who place a higher value on service than on
the former bilateral Lufthansa alliance partners became price and may recognize a continuous improvement of the
subsequently integrated into the STAR Alliance. Due to the fact technological service provided by Lufthansa.
that the foundation of the Alliance lies even a substantial time A second development is focused on luxury loving customers,
span before the turn of the millennium raises doubt if it can be meaning business and first class customers of Lufthansa. As
seen as a direct reaction to analyzed environmental forces in the with the Star Alliance, Lufthansa has already used certain
dimension of economical, social and technological factors as offerings as business lounges and designated cabin segments for
well as competition. Profound answers on that could only be decades, however they have as well been continuously
given by internal company data. Nevertheless the alliance group improved to meet contemporary technological standards, as for
incorporates responses to some of the factors, which are similar example the equipment of all their lounges with WLAN
to those of the bilateral Lufthansa alliances and joint ventures. hotspots as a reaction to technology advancements (Deutsche
The STAR Alliance reacts and promotes demand for air travel Lufthansa AG, 2004). However, those actions are nowadays in
by increasing the destination network and it tries to give times of smartphones relatively outdated. Other adaptions for
satisfaction to luxury loving business travellers by making more price insensitive customers have been the building of a
services as lounges and mile upgrades available within the whole first class terminal at the main hub Frankfurt
whole alliance network (Singapore Airlines, 2014; Turkish International Airport (Deutsche Lufthansa AG, 2005)
Airlines, 2008). However, as criticized by CNN benefits for accompanied by special first-class lounges and areas at other
customers are just superficial if one is a less-frequent flyer main hubs. These first-class services for example include
(Snyder, 2011). Again this alliance network appears to be special limousine services or the provision of personal
facilitated and improved over time by the development in ICT assistants for the term of stay. Furthermore did the Lufthansa
capabilities, nonetheless ICT capabilities are not assumed to be Group establish a complete new subsidiary in 2005, namely
a driving force for this adaption in the key partner building Lufthansa Private Jet (Deutsche Lufthansa AG, 2006). However
block. Next to that, it does not appear to counteract to low-cost this feature plays partly in the building block of customer
competition, since the alliance is more aimed on the long-haul segments. It offers customers almost, if not the same, inflight
market. services as during a first class flight, with the difference of
4.2.2 Value Proposition having the plane solely for yourself and your guests. Therefore
The building block of value proposition describes the value that it can be said that this offering is rather designated for
is delivered to the customer in form of the product and service completely price insensitive consumers. It is proposed that by
offering. In here Lufthansa has reacted to three influencing these actions and adaptions to their product and value offerings
forces, namely the social and technological environmental Lufthansa clearly responds to the social dynamic of different
dimensions as well as to low-cost competition. types of (business) travellers, being focused on the segment of
high-class luxury loving passengers. At the same time this
A key feature of a customer’s flight experience is probably developments may react on the competition of low-cost airlines,
represented by contemporary inflight entertainment, which since by these changes Lufthansa clearly differentiates its
Lufthansa constantly tried to maintain and improve. As an offering from its biggest rivals in the market. Albeit, it appears
example they introduced as part of their air fleet overhaul in doubtful in how far the introduction of Lufthansa Private Jet
seat monitors for watching most recent TV shows and movies affects its low-cost competition since it seems unlikely that
or for playing video games, which is mostly focused on long- those customers would usually consider low-cost services of
haul operations (Deutsche Lufthansa AG, 2008; Deutsche other airlines in the short-haul market.
Lufthansa AG, 2009). Next to that Lufthansa was the first
airline introducing Internet on its long-haul flights between 4.2.3 Customer Segments
2004 and 2006 (Deutsche Lufthansa AG, 2004; Deutsche The next building block under analysis is represented by the
Lufthansa AG, 2005). This offer has been again introduced in adaptions to the customer segments of the Lufthansa Group.
late 2010 for North-Atlantic flights after Lufthansa was able to Here findings are most recent and as well most crucial for the
find a suitable partner (Deutsche Lufthansa AG, 2011a). The overall analysis. As a first thing Lufthansa announced in 2012
newest innovative adaption by Lufthansa is called that they would introduce the new cabin offering of premium
BoardConnect, which shall be introduced in 2014 (Deutsche economy class on long-haul flights (Deutsche Lufthansa AG,
Lufthansa AG, 2013c.). This system allows passenger to access 2013a). As recently announced this service adaption will start in
an app on their smartphones or tablet computer by which they the end of 2014 (Bryan, 2014a; Deutsche Lufthansa AG, 2014a;
can make use of all inflight entertainment or place a menu order Deutsche Lufthansa AG, 2014b). The class combines inflight
with one of the flight attendants (Lufthansa Systems AG., services with a tendency to the level of the business class with a
2014a). All these adaptions to the delivered customer value more affordable lower price. A substantial change represents
clearly represent a reaction to the dynamic of rapid the option for premium economy passengers to access airport
improvements in ICT and the Internet technology. Similarly, lounges for a fixed fee of 25€ (Deutsche Lufthansa AG, 2014b),
the introduction of Internet offerings during the flight may as which were before exclusively accessible if a customer
well appeal to business travellers since it may allow them to belonged to business or first class or had a high frequent flyer
keep on working during a long-haul flight. Likewise does status. It is expected that this adaption is intended to serve the
Lufthansa react to the competition of low-cost airlines, by more price sensitive customers, which are at the same time
improving their inflight-service value, which may convince attracted to more luxurious services, and would therefore be
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